Apple Earnings Preview: Can Services Growth Offset iPhone and Tariff Concerns?
$Apple(AAPL)$
Core Financial Indicators
~Revenue: The market consensus for revenue is $88.96 billion, representing a 3.7% year-over-year (YoY) increase. This aligns with Apple's guidance from the last quarter for low-to-mid single-digit revenue growth.
~Gross Margin: Apple's guidance from the previous quarter projected a gross margin between 45.5% and 46.5%, which includes a $900 million impact from tariff-related costs.
~EPS: The consensus estimate for Earnings Per Share (EPS) is $1.421, a 1.5% increase YoY.
Three Things to Watch
1. Will a persistent weakness in iPhone sales drag down Greater China revenue?
In recent years, the iPhone has faced challenges from softening demand. However, a structural shift in shipments towards higher-end models has helped elevate the overall Average Selling Price (ASP), preventing a significant decline in revenue. In Q2 FY25, iPhone revenue grew by a modest 2% YoY, marking the 12th consecutive quarter where revenue has fluctuated within a narrow range of -10% to +10%.
As a key market for the iPhone, Greater China has seen its revenue growth lag behind the company's overall growth rate for seven consecutive quarters, primarily due to intensifying market competition. Interestingly, this timeline closely corresponds with the return of Huawei's 5G chip to the market. Conversely, the strong performance of Greater China revenue back in 2021 was related to Huawei's exit from the 5G market at that time.
According to data from the China Academy of Information and Communications Technology (CAICT), iPhone shipments in mainland China declined by approximately 9% YoY in the first five months of 2025. However, the decline narrowed to 4% YoY for the April-May period, an improvement from the 13% drop seen from January to March. Apple's management has previously highlighted that national subsidy policies in mainland China are expected to stimulate handset demand.
2. Will Services growth accelerate?
As the core engine of Apple's valuation flywheel, the Services segment is also the company's only business that has maintained continuous growth. Apple's Services revenue has grown YoY consistently since Q4 FY18 and has now recorded double-digit YoY growth for six consecutive quarters.
Nevertheless, the market remains concerned about a potential slowdown. The "over 1 billion paid subscriptions" figure has not been updated for six straight quarters. Furthermore, in a rare move during the last earnings call, management did not provide specific revenue growth guidance for the Services segment.
Apple's Valuation Flywheel: AAPL = Active Installed Base * Customer Engagement
3. What will be the impact of tariffs?
As a master of the global supply chain, Apple is one of the companies significantly affected by potential global tariff policies, such as those proposed by the Trump administration. Last quarter, management stated they had not observed significant demand pull-forward due to tariffs but confirmed the company did build up inventory in advance. For the current quarter, the company will recognize $900 million in costs attributable to tariffs. Management's commentary on the tariff situation this quarter will be closely watched.
Option Market Signals
The options market is pricing in a significant price move for Apple post-earnings, as evidenced by the high Implied Volatility (IV Percentile at 60%). Sentiment, based on the Put/Call ratio of 0.72, is leaning more towards a positive or neutral outcome rather than a significantly negative one.
Traders are actively positioning for the event, but the high IV suggests that buying options outright is expensive. Sophisticated investors might be looking at strategies that profit from the expected drop in volatility after the announcement.
Summary of Risks and Opportunities
Overall, the market tends to be highly forgiving of Apple's performance, as its revenue and profit fluctuations are generally modest. Investors are more focused on the long-term potential and imagination surrounding the Services business, viewing tariffs as a short-term disturbance.
Potential Positive Catalysts: Increased monetization levels within the Services business.
Risks to Monitor: The impact of tariffs on costs.
Valuation:
Apple's current P/E ratio is 33x, which is at the 73rd percentile of its 5-year historical range and slightly above its historical average.
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